If the spot exchange rate is yen120/€1 and the one year forward exchange rate is yen130/€1. Then the euro is at a forward: Select one: a. O b. C. d. premium and the one-year European interest rate is lower than the one-year Japanese interest rate. discount and the one-year European interest rate is higher than the one-year Japanese interest rate. premium and the one-year European interest rate is higher than the one-year Japanese interest rate. discount and the one-year European interest rate is lower than the one-year Japanese interest rate.

If the spot exchange rate is yen120/€1 and the one year forward exchange rate is yen130/€1. Then the euro is at a forward: Select one: a. O b. C. d. premium and the one-year European interest rate is lower than the one-year Japanese interest rate. discount and the one-year European interest rate is higher than the one-year Japanese interest rate. premium and the one-year European interest rate is higher than the one-year Japanese interest rate. discount and the one-year European interest rate is lower than the one-year Japanese interest rate.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 40QA

See similar textbooks

Similar questions

b) Assume that the one-year interest rate is 3% (per annum) in the UK and 2% (per annum) in the Euro area. Also, assume that the current spot exchange rate of one pound to the euro is €1.1500/£ and that the corresponding one-year forward rate is €1.1400/£. i) Provide calculations to show whether the Interest Rate Parity (IRP) theory holds. ii) A UK-based investor has £200,000 to invest for a year either in the Euro area or the UK. Using the above information, determine which investment will generate a higher return for them. iii) Discuss the extent to which your results in i) and ii) above provide support to the Covered Interest Rate Parity (CIRP) condition.
Suppose that the spot rate for the euro is $1.5400 and with a forward premium of 2.00%. Which of the following most closely approximates the implied forward rate of the euro in this situation? O-$0.0016 O-$0.0031 O-$0.0047 O $1.5708
You are given the following information:Spot exchange rate (AUD/EUR) 1.60One-year forward rate (AUD/EUR) 1.62One-year interest rate on the Australian dollar 8.5%One-year interest rate on the euro 6.5%(a) Is there any violation of CIP?(b) Calculate the covered margin (going short on the AUD).(c) Calculate the interest parity forward rate and compare it with the actual forward rate.
If one year forward rate is EUR2.1830/OMR and interest rate for EURO is 6% per annum and for OMR is 8% per annum. What should be spot exchange rate if interest rate parity holds and OMR is the Home currency? EUR2.14257/OMR USD2.0819/OMR USD2.22418/OMR None of these
The current USD/EUR exchange rate is [de] dollar per euro. The one-year forward exchange rate is [fe]. The one-year USD interest rate is [rus]% p.a. semiannually compounded. Estimate the one-year EUR interest rate (p.a. semiannually compounded, stated in percent). Inputs: de, fe, rus = 1.85, 1.75, 1.31 Tip: Use the CIP
Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity. A. discount; increase B. discount; decrease C. premium; increase D. premium; decrease
Suppose the current USD/EUR spot exchange rate is 1.20$/ €. At the same the euro interest rate amount to 10% per year while the dollar interest rate is 0% per year. a. What is the no-arbitrage one-year USD/EUR forward exchange? b. Suppose the one-year USD/EUR forward exchange was 1.25$/ €. How could you make money from this situation? 4
Suppose that the current spot exchange rate is €1.72 per £ and the one-year forward exchange rate is €1.80 per £. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., £581,395, at the current spot exchange rate. Required: a. If you are a euro-based investor, how can you realize a guaranteed profit from covered interest arbitrage and the size of arbitrage profit? b. How will the interest rate parity be restored as a result of the above transactions? c. If you are a pound-based investor, what is the covered arbitrage process and the size of the arbitrage profit? Complete this question by entering your answers in the tabs below. Required A Required B Required C If you are a euro-based investor, how can you realize a guaranteed profit from covered interest arbitrage and the size of arbitrage profit? Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar. Profit from…
assume that the one-year interest rate is 4.0 percent in the united states; the spot exchange rate is $1.25/euro, and the one-year forward exchange rate is $1.16/ euro, what must the one - year interest rate be in the euro - zone to avoid arbitrage?
(c) If the one-year interest rate on a dollar denominated Treasury bill is 4.5% p.a. and that on a similar Euro-denominated security is 7.5% p.a. and the current spot rate is USD 1.08/EUR, what forward exchange rate will prevent covered interest arbitrage?
Analyse the scenario below. In each case, explain your reasoning Suppose that the current EUR/GBP exchange rate is £0.92 per euro. The current2-year interest rates are: GBP 4%, EUR 5%. Suppose further that you can use a 2-year forward contract with a EUR/GBP rate of £0.91 per euro. Could this contractbe used for an arbitrage opportunity? If yes, provide an example. Calculatearbitrage profit and explain how this profit can be earned
Suppose that the one-year interest rate is 4.0 percent in Italy, the spot exchange rate is $1.58/€, and the one-year forward exchange rate is $1.60/€. What must one-year interest rate be in the United States? 2% 5.32% 2.7% None of the above